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Friday, February 18, 2011

A Six Point Solution to Inequality

Seven Policies to ReverseAmerica's Inequality Story . . . and Beyond

The Inequality Story:
"America's Inequality Story," to give it a name, is copiously documented; State of Working America has web pages that show many graphs that quickly and easily demonstrate rampant inequality; UC Berkeley Professor Emmanuel Saez reports in "Striking It Richer" that the top 1% of households “captured slightly more than half of the overall economic growth over the period 1993-2008. . . in the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth.” The period 1940 to 1980 stands in contrast; the portion going to the top 10% never exceeded 35% of the nation's income, while in 2007 they captured 49.7%, an all-time historical record. Almost all the shift of income went to the top one percent. Another source, Edward Wolff, published a report, March 2010 for the Levy Economics Institute, showing, like the Saez report, the top one percent received more income annually than the bottom 60% and owned more assets than the bottom 90%. Inequality.org also is a rich source of data on, of course, inequality. For instance they note, "In 1979, the average income of the top 5 percent of families was 11.4 times as large as the average income of the bottom 20 percent. In 2005, the ratio was 20.9 times. (EPI, State of Working America 2006-07, Figure 1J )".

Our rich economy annually creates $46,000 of value for every human being in the nation. Yet the distribution of income, according to the Brookings/Urban Institute Tax Policy Center, shows the following distribution by quintile (or 20% of households group) from bottom to top for 2006: 1 - 2.5%, 2 - 6.4%, 3 - 11.4%, 4 - 19.8% (the total for the bottom 80% of households is 40.0% of the nation’s total pre-tax income for 2006) and the fifth quintile, 5 - 60.3%. The bottom 80% receive 40% of the nation’s income; the top 20% receive 60%. The bottom 80% of households’ income from salary and wages is 28.2% of the nation’s total income.

The Citizens for Tax Justice also breaks down income distribution according to quintiles, showing average annual income for the 5 quintiles of tax filers: 1 - $13,000, 2 - $26,100, 3 - $42,000, 4 - $68,800, 5 - $210,375. This ratio roughly duplicates the ratio from the Tax Policy Center. I'll try to make it simpler: The bottom-earning 60% on average receive $27,000 per household, the households in the range of 60% to 80% receive the nation's mean average income, $68,800, and the last to 20% receive over $200,000. These are the average pre-tax incomes for each 20% of households from bottom to top. The average income of the top 20% is five times greater than the average income for the lower 80%. One worker receives $5.61, while four workers’ average income is $1.00. I know I’ve thrown out too many numbers, but I’m trying to make a strong point. It’s hard to believe how skewed our economy’s income distribution is.

The U.S. has the most unequal distribution among industrial nations (the OECD nations), and among all nations in the world we rank at #73 in inequality behind such nations as Morocco, Ethiopia, Pakistan, Bangladesh, India, Russia, Egypt and Romania. The U.S. also has the highest childhood poverty rate among all developed nations. France has about the same child poverty rate as the U.S. before government interventions. France reduces childhood poverty to 7%, we reduce it to 20%.

Searching for solutions, Demos and Campaign for America's Future published a report written by Jeff Madrick on “Jobs, Deficit Reduction and America’s Economic Future.” He presents a very detailed program. I cannot rival Madrick’s erudition, but I will present here a six step program:

The Seven Policies: 1. create tariffs and quotas on foreign imports combined with new trade treaties designed to bring back manufacturing jobs; the nation has fewer private sector jobs in 2011 (see America'sNew Post-Recession Employment Arithmetic ) than it had in 1999 and we had better stop exporting our jobs’; this proposal comes from William Greider's book Come Home, America, page 103; and since our trade deficit is so high, the World Trade Organization allows the U.S. to impose these tariffs; read this November 2010 article by Greider. The American Prospect devoted the December 2011 issue to US manufacturing. Also view the six proposals from the Campaign for America's Future. And review the proposals and plans by William Lazonick and Jon Rynn at New Deal 2.0. The common theme is to end the trade deficit and restore manufacturing employment which pays about $70,000 per year per job.

2. impose taxes on value-added imports of multi-national corporations who assemble products like Ford trucks at $15 a day labor cost in northern Mexico; this tax again would return manufacturing work to the U.S.; the key focus is to seal our marketplace and our purchasing dollars from low-wage exploitative labor markets and stanch the investment flow of U.S. investment wealth into low-wage countries, the race to the bottom; this idea is elaborated by William Greider in his book, page 104, "Applying a general emergency tariff (or similar devices like import certificates) would put a temporary collar around the size of US trade deficits and then gradually shrink them."

3. install a full employment program as presented by Professor Phillip Harvey of Rutgers University, “Learning from the New Deal”; see National Jobs for All Coalition, njfac.org; Philip Harvey, a law professor at Rutgers University, has published through Demos a more recent version of his jobs program, "Back to Work" January 2011. His program touts the creation of 1 million jobs for the price of $28 billion, which comes to $224 billion for 8 million jobs. Think about eliminating the expense for wars in Iraq and Afghanistan, cutting the military by 1/5th, and restoring an economy to the 37.1% of Americans who have less than $12,000 in savings (24.1% who have no savings at all). To be clear, 2 of 8 Americans live in a family with no savings, and another 1 in 8 live in a family with less than $12,000. The economy creates $47,000 of output per year per human being, and $109,000 per year per worker. On November 25, 2011, this excellent article on public jobs was posted at Truthout.com.

5. authorize Professor Robert Pollin’s program, UMass/Amherst, that suggests a federal government guarantee of private bank loans to local and state governments for local jobs programs, mostly insulation work on government building and then private housing stock; Pollin's program would create 18 million jobs. He also presented a more recent article series in the Boston Review. Banks are sitting on $1 trillion of mostly tax payer money and not making loans; the S and P 500 corporations achieved record profits in the third quarter of 2010 of $1.66 trillion, yet still they are not adding new jobs;

6. create a free childcare policy per the program "Why Obama Should Care about Care" at Levy Economics Institute. This would employ many women in a government jobs program that tends to employ mostly men; it would relieve family budgets of many low-income parents.

These six new policies would restore employment and create a healthy, balanced economic growth.

My essay of September 8, 2011, on the financial system offers7 proposals to reform finance. Add public banking and finance to the indispensable changes to our economy. Here are two sites devoted to public banking, one and two.
Also see this interview on The Real News Network about the European banking crisis, with University of London economist Costas Lapavitsas advocating public banking. "For the last half-century, as noted above, the financial explosion was behind much of the economic growth. The total debt in the U.S. economy went from around 150 percent of the GDP in the mid-1980s to well over 300 percent by the beginning of the Great Recession in December 2007." states Fred Magdoff in this essay at the Monthly Review. Between 2001 - 2007 aggregate debt increased 5 times faster than GDP growth, $3 trillion per year vs. $600 billion per year, according to Magdoff. There was a rapidly expanding supply of savings or wealth competing for ownership of a stable or slowly growing asset base, and this led to over-valuation and speculation, in essence financial fragility, not to mention unproductive use of resources. How can the financial sector grow at 12% a year while the overall economy grows at only 3% a year?

Unequal and Unstable is a fine article, with excellent graphs, January 2012, making the argument that
"the history of the past century reveals a striking correlation between income inequality and financial crises. Our analysis suggests that this is no coincidence: income inequality generates financial fragility by increasing leverage ratios among lower- and middle-income households, fostering a pool of idle wealth that increases the demand for investment assets and financial innovation, and allocating asymmetrical political power which reduces regulation and threatens financial instability." This from Thaker and Williamson at The New America Foundation.

From the essay by Stephen Dunn in Challenge magazine, November 2011, "Was Galbraith Right?", he states, "According to the McKinsey Global Institute, the ratio of global financial assets to annual world output has tripled from 109 percent in 1980 to 316 percent in 2005 (Wolf, 2007). By 2005, the global stock of core financial assets had reached $140 trillion." In perspective the annual world GDP in 2005 was around 4 times the US GDP of $12.6 trillion, meaning the global GDP stood at under $50 trillion, with financial assets at $140 trillion.

In the Great Financial Crisis, page 121, by Magdoff and Foster, they show that financial firm debt grew from 10% of GDP in 1970 to 116% of GDP in 2007. Why did financial assets and debt increase so much? Had incomes, growth rates, and ability to repay loans increased similarly, or was there a surplus of wealth bidding up prices accompanied by unbridled speculation? In my view there was a glut, an excess of wealth hoarding, that produced unproductive wealth distribution benefitting a small minority -- read 1% -- who had no productive outlet for all that capital. At a minimum the Glass Steagall separation of investment and commercial banks is needed.

L. Randall Wray writes in the Cambridge Journal of Economics, 2009, after the wave of mortgage defaults, bank bankruptcies and bailouts, emloyee lay-offs, declining profits, and government interventions had begun, "Total commitments by the US government (including loans, guarantees, capital injections and fiscal stimulus packages) already approach $9 trillion. Note that securitised subprimes totalled just $2.5 trillion. Clearly the losses are not simply a matter of bad mortgage loans made to low income borrowers to buy unaffordable suburban mansions. Rather, this is a crisis of the money manager system. And because so much of it is unregulated, unreported and off balance sheet, there is no way to guess the ultimate scale of losses. A secret report is rumoured to estimate that Euroland’s banks hold $25 trillion of questionable assets. To repeat, it is a global crisis. . . . It is time to take finance back from the clutches of Wall Street’s casino.

What will replace money manager capitalism? Only time will tell."

Inequality at the Root
A targeted and calibrated ratio of income and wealth distribution may be the ultimate solution for capitalism. For instance, Sam Pizzigati in his book Good and Greed proposes a maximum income no greater than 10 times the minimum income. For example, every worker earns between $20,000 and $200,000. Other ratios are conceivable. We are apt to be living in a Neo-feudal world at the rate we are going, nationally and internationally. The only lasting solution is an appreciation of the inescapable, ineluctable conclusion that capitalism requires balance between trading parties. Challenge Magazine, September/October issue has an article by Robert Wade pointing to this conclusion, "The Ongoing Costs of Global Inequality." (Not available by Internet) But this Robert Wade article is available.

And, to make it too complicated, I’ll toss in 3 more policy meassures: pass the Employee Free Choice Act for workers who want unions; require corporations to place non-shareholder representatives on their boards of directors; create more legally mandated vacation days for the over-worked U.S. workforce. There is no end to reforms. Everyone has their favorite. My favorite is to outlaw money. But until that time comes, we have to pay for these reforms.

As for paying for these programs, you know the top one percent of U.S. households own 37.1% of all private assets in the nation, and that comes out to $20 trillion. The top 10% own 70%, and that comes to about $38 trillion. These people don’t pay “overall” an effective tax rate that is much higher than most people. The Citizens for Tax Justice shows that the top one percent pay an effective overall tax rate of only 30.9% on incomes averaging $1,445,000 a year and wealth averaging $18,500,000. The average overall effective tax rate for the bottom 80% of income earners is 24.5%. By raising the capital gains tax rate from 15% to the normal income tax rate of 35%, government revenues would grow by an additional $200 billion to $266 billion. A tax on financial speculation could bring in $100s of billions. Closing a tax expenditure to financial corporations’ interest payments brings in another $77 billion. Congresswoman Jan Schakowsky has a plan to cut the deficit by $400 billion and still have $200 billion for a jobs program. Spending $200 billion federal dollars can create 5 million jobs at $40,000 per job. She suggests following the outlines of the Local Jobs for America Act. One can download her program at her web page.
The People's Budget from the Progressive Caucus also includes public jobs and claims to balance the budget by 2021.

To reach the pre-recession, late 2007, rate of unemployment, 5.0%, the economy needs 11 million jobs. The Economic Policy Institute reported that, “This means the labor market is now nearly 11 million jobs below the level needed to restore the pre-recession unemployment rate (5.0% in December 2007). So, despite the job growth of 2010 [of 91,000 new jobs per month], we remain near the bottom of a very large hole. To achieve the pre-recession unemployment rate in five years, the labor market would have to add nearly 300,000 jobs every month for the entire period.” At our present growth rate, 91,000 per month, it will take until 2026 to create the same number of new jobs. Do you believe the economy will triple its 2010 rate of job creation for the next 5 consecutive years?

Creating federal jobs would get the economy cooking again, and the other policy changes in regards to imports would help balance the income distribution ratios.

Robert Reich, a professor at U.C. Berkeley, has published his multi-point plan, as of July 15, 2011. See this article.

The Nation Magazine presented an issue devoted to Reimagining Capitalism, where you'll find twelve proposals that would reform our system substantially. The German nation after all has approximately the same per capita national income, but their distribution rates 25 on the Gini Index, ours rates 41 or 46, depending, and workers work nine weeks less, 45 fewer days, each year than U.S. workers on average. They have prosperity, leisure, and economic justice. Potential improvement is vast for the U.S.A.

There are many solutions, and the best ones begin with adjusting how the nation's income is distributed. We have to understand our condition and find broadly based support for fair change. Ben Leet